Nicolas Sarkozy and Angela Merkel were frustrated by Britain's attitude. David Cameron has failed to make any friends in Europe. Photograph: Ian Langsdon/EPA

Veto is a powerful word. It sounds presidential. It smacks of decisiveness. It rings with defiance. So in every interview he has given since the Brussels summit, David Cameron has boasted of wielding "the veto". For a day or two, it might just gull the more simple-minded Eurosceptics in his party that their prime minister did something tremendously strong when he left himself and his country in a minority of one.

Yet in all the dictionaries that I am familiar with, "to veto" is to prevent something from happening. While it is technically true that he "vetoed" an EU-wide treaty, the prime minister did not actually stop anything meaningful at all. The only thing he has blocked is British influence over negotiations vital to this country's future.

The rest of the European Union simply shrugged at his "veto" and will now proceed to try to fashion a new regime for the eurozone without a British voice in the room. The prime minister's agenda is left in shreds. He did not get the protocol he wanted to exempt the UK from European regulation of financial services and Britain's exclusion from the negotiations means that he is now even less likely to secure one in the future. He may get a hero's welcome from some of the Tory Eurosceptics who are exulting in Britain's isolation and celebrating this as the most magnificent performance since Margaret Thatcher wielded the handbag. But that is likely to prove to be very short-lived. They forget that Mrs T never made the mistake of leaving an empty chair where Britain ought to be sitting. Once their initial euphoria has worn off, Tory sceptics will discover that this outcome does not advance their ambition to repatriate powers from Brussels – it has made it even harder to achieve.

This abject defeat for British diplomacy, arguably the worst reverse in many decades, is the more striking because what he sought in Brussels was not that extravagant. He did not go to the summit – as some of the frothier sceptics in his party had been demanding – seeking the immediate and unconditional return of a fistful of powers. He argued merely to be allowed to hold on to some rights that Britain already has. The British demands were – at least from a British perspective – really very modest. One cabinet minister describes them as not much more than "a fig leaf" so that the prime minister wouldn't be left naked before his Eurosceptic backbenchers.

His deputy prime minister had done his best to help. In the weeks running up to the summit, Nick Clegg had worked very hard behind the scenes to try to find a navigable passage between the pressure on the prime minister from the Tory party and the agenda of European leaders. According to allies, the Lib Dem leader "talked down" the prime minister from making impossibilist demands at the summit. At the same time, Mr Clegg tried to impress on European leaders the difficulties Mr Cameron had with managing his party. The deputy prime minister talked to a number of important liberal and centre-right politicians in the EU and made an unpublicised trip to Madrid to try to butter up the new Spanish prime minister.

Mr Clegg did his very best, but his hidden shuttle diplomacy was not enough to save the day either for the prime minister or for his deputy whose pro-European party is now writhing in agony about being part of a government that has cast Britain to the outer fringes of the EU.

"What we were asking for was extraordinarily mild," says one cabinet member. "It was pretty technical stuff." Yet there was no inclination among the other leaders to accommodate Britain. They have become so weary of this country's truculence that they will not give Britain a hearing, even when its government is trying to be reasonable. According to officials, the other leaders barely gave David Cameron the time of day. Even European leaders who can normally be counted as sympathetic to the British agenda weren't interested.

The French were the most contemptuous, "dismissing out of hand" any proposal from the British. At the most senior levels of the cabinet, among both Tories and Lib Dems, ministers are spitting with fury that Nicolas Sarkozy would make no compromises which might have lubricated an accommodation. This was partly the result of a personal failure by David Cameron: his complete lack of friends in Brussels starkly reveals that he has not nurtured vital relationships with other key actors. It is usual at such summits for leaders to be quite understanding of each other's needs to have "wins" that they can take back home to please their parties and voters. During the very difficult negotiation of the Maastricht treaty, John Major extracted crucial concessions, including the opt-out from the single currency, for Britain because he had cultivated a relationship with Helmut Kohl. The then German chancellor persuaded other reluctant European leaders to agree by telling them: "John needs this." No one in Brussels thought they owed David Cameron any favours. Angela Merkel went so far as to question whether he had even negotiated in good faith, saying afterwards: "I really don't believe Cameron was ever with us at the table."

As for Nicolas Sarkozy, the brief warm fling with the French president, when the two men were brothers-in-arms over the Libyan intervention, has soured into a bitter animosity. One French diplomat ridiculed David Cameron by describing him as "like a man who wants to go to a wife-swapping party without taking his own wife". The French president repeatedly rounded on the prime minister, accusing him of trying to have it both ways, making demands for Britain without ever putting anything on the table.

When we are seeking explanations for the almost total collapse in Anglo-French relations, George Osborne also has something to answer for. Three weeks ago, the chancellor tried to make his own economic record look good by painting the position of the French as black. He publicly suggested that France could be engulfed by an attack from the bond markets of the sort that has convulsed Italy, Spain and Greece. This was understandably regarded as deeply unhelpful by the French. They have been seething ever since.

So there is something in the suggestion that the debacle in Brussels was Gallic revenge. Yet the question British ministers have to ask themselves is why did Nicolas Sarkozy find it so easy to isolate David Cameron, cast him as the most unreasonable person in the room and maroon Britain in a minority of one? One reason it was pretty easy was because of earlier decisions made by Mr Cameron that had already marginalised him. He had previously chosen isolation when he took the Conservatives out of the European People's party, the mainstream grouping of centre-right parties. If he thought then that this was a cost-free gesture to his sceptics, he ought to know better now. He was not present at either a pre-summit gathering of the EPP in Marseilles or a Brussels dinner on the eve of the negotiations when President Sarkozy, Chancellor Merkel and other key leaders fixed many of their positions. The prime minister might have been in a less hopeless position had he not excluded himself from these crucial gatherings.

Deeper forces were also at work. After years of hearing anti-European prejudice spew out of Britain, it ought not to be surprising that so many Europeans react with hostility, or simple indifference, to British demands. In advance of the summit, some of the prime minister's officials talked up the idea that Britain would become the leader of an Outer Europe composed of the non-euro members. Yet Britain could not even find allies there. The new "euro-plus group" will include at least 23 and possibly all 26 other members of the EU.

Even Eurosceptics will soon find that there is nothing splendid about isolation. Our capacity to shape the future of the world's wealthiest economic bloc, which is also our most important export market, has just been dramatically diminished. This will have consequences not just for Britain's influence in Europe, but its standing in the world. A Britain with reduced clout in the European Union is a Britain of less interest to the United States, China or any other important global power.

Though David Cameron acted in the name of protecting the City of London, the City is aghast. Far from safeguarding British banks and other financial interests from Brussels, Berlin and Paris, Britain is now locked out of crucial negotiations on the future form of regulation. As for Tory Eurosceptics, once their misguided intoxication has worn off, they will sober up to find that their agenda of repatriating powers from Brussels has been retarded, not advanced.

Britain has been left more bereft of allies on its own continent than at any time since it joined what became the European Union in 1973 – perhaps more isolated than at any time since 1945. Forget talk of a two-speed Europe. What we have now is a three-speed Europe with Britain left stranded on the hard shoulder.